The Hong Kong's 2020-21 Budget: Introduction of limited partnership regime for funds - Deloitte
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The Hong Kong's 2020-21 Budget: Introduction of limited partnership regime for funds Hong Kong long-awaited limited partnership regime for funds (LPF Regime) designed for private funds is expected to arrive later this year. As outlined in Hong Kong's 2020-21 budget on 26 February 2020, the Hong Kong government has stated that they will make every effort to introduce the new LPF Regime specifically for funds by preparing draft legislation in the upcoming legislative session. The government is also planning to provide tax concessions for carried interest issued by private equity funds operating in Hong Kong, subject to the fulfilment of certain conditions, which once enacted, should hopefully help address the concern that the taxation of carried interest in Hong Kong has been a contentious issue for long. Together with the already enacted unified Hong Kong tax exemption regime for funds (which provides Hong Kong tax exemption to all funds provided conditions are satisfied), the new LPF regime will not only attract more funds to Hong Kong and accelerate the development of such private funds, it can also drive up demand for capital, talent and expertise into different sectors including technology and professional services taking advantage of the tremendous business opportunities inherent to the Greater Bay Area.
What are the current options for funds establishment
in Hong Kong and why is Hong Kong's existing limited
partnership ordinance not sufficient?
Currently, funds are mainly established in Hong typically used to establish professional practices
Kong in the form of unit trusts or open-ended such as accountancy, law, etc., rather than
fund companies ("OFC")1 , however, not all meeting the needs of the funds industry. The
overseas fund managers are familiar with the existing ordinance possesses less flexibility
Hong Kong's trust law or OFC regime. Instead in governing matters pertaining to capital
it is much more common for fund managers to contributions and the distribution of profits.
establish their fund, especially private equity It currently cannot suit the operational needs
("PE") funds via general partner/limited partner that fund managers require, such as variable
structures based in offshore jurisdictions such share capital arrangements to meet investors'
as Cayman Islands where they have the relevant ad hoc subscription and redemption requests,
Exempted Limited Partnership law tailored for or streamlined procedures for termination. As a
funds. result, fund managers often hesitate to establish
funds in Hong Kong. Differences in tax treatments
Hong Kong's own Limited Partnerships Ordinance is another common consideration, but this falls
(Cap. 37) was enacted a century ago, and is outside the scope of discussion for this article.
What are the opportunities open to Hong Kong with
the introduction of the LPF Regime?
In the backdrop of the global regulatory eventually need to demonstrate this, perhaps
landscape for the fund industry, the Organisation with the maintenance physical presence (e.g.
for Economic Co-operation and Development office), or the hiring of full time employees in the
("OECD") introduced Base Erosion and Profit offshore jurisdictions in which they are situated.
Shifting ("BEPS") over 135 countries including It is also the trend that such requirements might
Cayman Islands to combat tax avoidance with be further tightened in the future. Taken together,
the concept of "economic substance" test. these push factors may lead fund managers
Accordingly, fund managers who are used to around the world to revisit their fund structures,
establishing their funds in offshore jurisdictions and consider moving their funds and business
without "economic substance" are now potentially activities back onshore.
subject to regulatory challenge, and may
1
The new opened-end fund company ("OFC") regime was introduced to Hong Kong in July 2018. Below is the FAQs of OFC provided by Financial Services and The
Treasury Bureau: https://www.fstb.gov.hk/fsb/ppr/consult/doc/ofc_faq_e.pdf
Meanwhile, in February 2020, the Cayman Islands has been added to the European Union ("EU")'s
blacklist of non-cooperative jurisdictions, which means that the Cayman Islands may be subject to
additional administrative or defensive measures imposed by the EU member states. This could be
another push factor for industry players to consider re-domiciling their funds.
The new LPF regime is poised to play a key role in attracting fund managers, especially those based in
Asia, to consider establishing new funds or re-domiciling their existing funds in Hong Kong.
What are the key features of the proposed LPF regime?
1. Constitution of an LPF: at least two partners (one general and one limited), under a written agreement such
as a limited partnership agreement.
General Partner: either an individual, a Hong Kong private company limited, a non-Hong Kong company
registered with Hong Kong's Company Registry or a domestic/offshore's limited partnership.
Limited Partner: either an individual, a corporation, a partnership, a trustee, an unincorporated body or any
other entity or body.
2. Legal liability: In line with prevailing overseas practices, LPF itself is not a legal person. The general partner
of an LPF has unlimited liability with respect to the debts and liabilities of the fund, as well as ultimate
responsibility for the management and control of the fund. On the other hand, the liability of limited partner(s)
of an LPF will generally be limited to the commitment they make to the fund, and will not have day-to-day
management rights or control over the underlying assets held by the LPF.
3. Registration: LPF shall maintain a registered office in Hong Kong. The application must be submitted by a
"presentor", either a registered Hong Kong law firm or a solicitor admitted to practice Law in Hong Kong. The
application shall be submitted to Hong Kong's Registrar of Companies.
4. Appointment of Investment Manager, Auditors and Responsible Person: LPF must appoint either a
Hong Kong resident over 18 years old or a corporation registered in Hong Kong as investment manager, as
well as a local auditor to perform annual audits of financial statements, and a responsible person (e.g. an
authorized institution, a licensed corporation, an accounting professional or a legal professional) to carry out
LPF's AML/CTF function.
5. Migration of funds: A streamlined channel will be provided to existing funds registered under the Hong
Kong's Limited Partnership Ordinance (Cap. 37) to migrate onto LPF regime.
6. Confidentiality of Limited Partners: The identity of the limited partnership would NOT be accessible
on public registers for the sake of confidentiality. The relevant records should still be kept at the registered
office or any other place in Hong Kong known to Hong Kong's Registrar of Companies and accessible by law
enforcement officers when necessary.
7. Tax and Stamp Duty Treatment: LPF can enjoy profit tax exemption provided that it meets certain
exemption conditions set out under Unified Funds Exemption regime. As for stamp duty, an interest in LPF
is not a "stock" and is not chargeable with stamp duty when the interested is contributed, transferred or
withdrawn.
What is the next step?
The legislative process of LPF regime is expected to complete in
year 2020 and hopefully it can commence this year.
We anticipate significant long-term benefits from the establishment
of this new regime, by shoring up Hong Kong's competitive
edge in the global asset and wealth management industry, and
further develop the growth of the private equity and family
offices industries. We will share with you more of our insights and
perspectives as and when future developments occur.
Key contacts
Assurance Tax
Ted Ho Adrian Yeung Wilson Cheung Anthony Lau Roy Phan
Partner Director Director Tax Partner Tax Director
Hong Kong Hong Kong Hong Kong Deloitte Hong Deloitte Hong
Tel: +852 2852 6489 Tel: +852 2852 1938 Tel: +852 2852 6609 Kong, China Kong, China
Email: teho@deloitte. Email: adyeung@ Email: wilcheung@ Tel: +852 2852 1082 Tel: +852 2238 7689
com.Hong Kong deloitte.com.Hong deloitte.com.Hong Email: antlau@ Email: rphan@
Kong Kong deloitte.com.hk deloitte.com.hk
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